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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 COMMISSION FILE NO. 0-6032
COMPASS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0593897
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
15 SOUTH 20TH STREET
BIRMINGHAM, ALABAMA 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 933-3000
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $2 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 28, 1994, the aggregate market value of voting stock held by
non-affiliates was $856,892,603.
Indicate the number of shares outstanding of the registrant's class of common
stock, as of the latest practicable date.
Class Outstanding at February 28, 1994
Common Stock, $2 Par Value 36,463,515
Documents Incorporated by Reference Part of 10-K in which incorporated
Proxy Statement for 1994 annual Part III
meeting, except for information
referred to in Item 402(a)(8)
of Regulation S-K.
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PART I
ITEM 1--BUSINESS
Compass Bancshares, Inc. (the "Company") is a financial institutions holding
company with its principal place of business in Birmingham, Alabama. The
Company was organized in 1970 and commenced business in late 1971 upon the
acquisition of Central Bank & Trust Co. and State National Bank. The Company
subsequently acquired substantially all of the outstanding stock of additional
banks located in Alabama, 11 of which were merged in late 1981 to create
Central Bank of the South, Alabama's first statewide bank. In February, 1987,
the Company acquired First National Bank of Crosby near Houston, Texas, and
became the first out-of-state holding company to acquire a bank in Texas. Since
that time the Company has acquired 19 banks in the Houston and Dallas areas. In
November, 1993, the Company changed its name from Central Bancshares of the
South, Inc. to Compass Bancshares, Inc. and Central Bank of the South, the
Company's lead bank subsidiary, changed its name to Compass Bank ("Compass
Bank").
In addition to Compass Bank, the Company also owns Compass Bank, N.A., a
national bank headquartered in Pensacola, Florida, Compass Bank, a federal
savings bank headquartered in Jacksonville, Florida ("Compass Bank-Florida"),
Central Bank of the South, an Alabama banking corporation headquartered in
Anniston, Alabama, and Compass Banks of Texas, Inc., a Delaware bank holding
company ("Compass of Texas"), which owns Compass Bank-Houston in Houston,
Texas, and Compass Bank-Dallas in Dallas, Texas. The bank subsidiaries of the
Company and Compass of Texas are referred to collectively herein as the
"Subsidiary Banks". Compass of Texas also owns River Oaks Trust Company with
offices in Houston and Dallas, Texas.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide them with capital and services of
various kinds. The Company derives substantially all of its income from
dividends from its subsidiaries. Such dividends are determined on an individual
basis, generally in relation to each subsidiary's earnings and capital
position.
SUBSIDIARY BANKS
Compass Bank conducts a general commercial banking and trust business at 89
locations, in 48 communities in Alabama. Compass Bank-Houston conducts a
general commercial banking business from 13 locations in Houston, Texas and
Compass Bank-Dallas conducts a general commercial banking business from 22
banking offices in Dallas and Collin Counties, Texas. River Oaks Trust Company
offers a full range of trust services to customers in Texas through its offices
in Houston and Dallas. Compass Bank, N.A. conducts a general commercial banking
business with five branches in Pensacola and Gulf Breeze, Florida. Compass
Bank-Florida conducts business from 16 locations in Jacksonville, Florida and 7
locations in Ft. Walton Beach, Florida. Central Bank of the South primarily
provides cash management services to commercial customers of the Subsidiary
Banks.
The Subsidiary Banks perform banking services customary for full service
banks of similar size and character for their customers in Alabama and north
Florida and the two largest metropolitan markets in Texas. Such services
include receiving demand and time deposit accounts, making personal and
commercial loans and furnishing personal and commercial checking accounts. The
Trust Division of Compass Bank and River Oaks Trust Company offer customers in
Alabama, Texas, North Carolina, Georgia and Florida a variety of fiduciary
services, including the administration and investment of funds of estates,
trusts and employee benefit plans. Other trust services include custodial and
portfolio management services, and acting as fiscal and paying agent and
trustee under corporate and government trust indentures. Through Compass
Bancshares Insurance, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks make available to their customers and others, as agent for a
variety of insurance companies, term life insurance, fixed-rate annuities and
other insurance products.
The Subsidiary Banks provide correspondent banking services including loan
participations, investment services, and audit services to approximately 1,025
financial institutions located throughout the Southeast and Southwest. Through
the Correspondent and Investment Services Division of Compass Bank, the
Subsidiary Banks distribute or make available a variety of investment services
and products to institutional and individual investors including sales of
municipal bonds, U.S. Government securities and asset/liability services.
Through Compass Brokerage, Inc., a wholly-owned subsidiary of Compass Bank, the
Subsidiary Banks also provide discount brokerage services and variable-rate
annuities to individuals and businesses. Through Compass Bank's wholly-owned
subsidiary, Compass Financial Corporation, the Subsidiary Banks provide lease
financing services to individuals
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and businesses. Compass Mortgage Corporation, a subsidiary of Compass Bank, was
organized in 1992 as a full-service mortgage corporation and currently
originates residential mortgage loans in Alabama, Texas and Florida.
NON-BANKING ACTIVITIES
Through wholly-owned subsidiaries, the Company is engaged in providing
credit-related insurance products to customers of the Subsidiary Banks and
owning real estate for bank premises. Revenues from operation of these
subsidiaries do not presently constitute a significant portion of the Company's
total operating revenues. The Company may subsequently engage in other
activities permissible for registered bank holding companies when suitable
opportunities develop. Any proposal for such further activities is subject to
approval by appropriate regulatory authorities. (See "Supervision and
Regulation".)
ACQUISITIONS
The Company may seek to acquire other banks and banking offices when suitable
opportunities develop. Discussions are held from time to time with institutions
primarily in Texas, Florida and Alabama about their possible affiliation with
the Company. It is impossible to predict accurately whether any discussions
will lead to agreement. Any bid or proposal for the acquisition of additional
banks is subject to approval by appropriate regulatory authorities. (See
"Supervision and Regulation".)
From 1991 to 1994, the Company acquired 15 financial institutions in Texas
and Florida. Acquisitions have been made on a competitive bid basis from the
Federal Deposit Insurance Corporation ("FDIC") and the Resolution Trust
Corporation ("RTC") and as the result of negotiations with boards of directors
and shareholders of the institutions. A list of the acquisitions completed from
1991 to 1994 with their asset size and closing dates follows (in thousands):
ASSETS METHOD OF
ACQUISITION DATE ACQUIRED ACCOUNTING
- ----------- -------- --------- ----------
Plaza National Bank............................... 1-31-91 $ 50,000 Purchase
Dallas, Texas
River Oaks Bancshares, Inc. ...................... 3-28-91 $ 427,000 Purchase
Houston, Texas
Gleneagles National Bank.......................... 5-9-91 $ 20,000 Purchase
Plano, Texas
Bank of Las Colinas, N.A. ........................ 5-9-91 $ 30,000 Purchase
Irving, Texas
Citizens & Builders Federal Savings, F.S.B. ...... 7-12-91 $ 39,000 Purchase
Pensacola, Florida
Promenade Bancshares, Inc. ....................... 7-31-91 $ 170,000 Purchase
Dallas, Texas
Ameriway Bank, N.A. .............................. 12-11-91 $ 40,000 Purchase
Houston, Texas
Interstate Bancshares, Inc. ...................... 6-18-92 $ 66,000 Pooling
Houston, Texas
City National Bancshares, Inc. ................... 10-28-92 $ 62,000 Pooling
Carrollton, Texas
FWNB Bancshares, Inc. ............................ 12-22-92 $ 161,000 Pooling
Plano, Texas
Cornerstone Bancshares, Inc. ..................... 1-19-93 $ 239,000 Pooling
Dallas, Texas
First Federal Savings Bank of Northwest Florida... 10-14-93 $ 101,000 Purchase
Ft. Walton Beach, Florida
Peoples Holding Company, Inc. .................... 10-21-93 $ 43,000 Purchase
Ft. Walton Beach, Florida
Spring National Bank.............................. 11-3-93 $ 75,000 Pooling
Houston, Texas
1st Performance National Bank..................... 1-27-94 $ 278,000 Purchase
Jacksonville, Florida
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PENDING ACQUISITIONS
On November 19, 1993, the Company entered into a definitive agreement to
acquire Security Bank, N.A. ("Security") of Houston, Texas for Company common
stock having a market value of $11,250,000, subject to certain conditions. At
December 31, 1993, Security had assets of $82 million and equity of $6 million.
The transaction is expected to close in the second quarter of 1994 and will be
accounted for under the pooling-of-interests method of accounting.
On November 12, 1993, the Company entered into a definitive agreement to
acquire three branches of Anchor Savings Bank located in Jacksonville, Florida.
At December 31, 1993, these branches had total deposits of approximately $35
million.
COMPETITION
The Subsidiary Banks encounter intense competition in their businesses,
generally from other banks located in Alabama, Texas, Florida and adjoining
states and compete for interest bearing funds with other banks, mutual funds
and with many issuers of commercial paper and other securities which are not
banks. Competition also exists for the correspondent banking and securities
sales business, which is particularly important to Compass Bank, from
commercial and investment banks and brokerage firms. In the case of larger
customers, competition exists with financial institutions in Texas and other
major metropolitan areas in the United States, many of which are larger in
terms of capital, resources and personnel. Increasingly, in the conduct of
certain aspects of their businesses, the Subsidiary Banks compete with finance
companies, savings and loan associations, credit unions, mutual funds, factors,
insurance companies and similar financial institutions.
There is significant competition among bank holding companies in most of the
markets served by the Subsidiary Banks. At December 31, 1993, the five largest
bank holding companies in Alabama (including the Company) accounted for
approximately 68 percent of the state's total bank deposits. The Company
believes that intense competition for banking business among bank holding
companies in Alabama, Texas, and Florida will continue and that during 1994 the
competition may further intensify if additional regional bank holding companies
enter such states through the acquisition of local bank holding companies or
savings and loan institutions and with continued consolidation of savings and
loan institutions with and into bank holding companies. Competition among bank
holding companies is also significant in Texas where the Company's Texas
Subsidiary Banks are located in major metropolitan markets having populations
of 3.9 million and 3.7 million people. The Texas Subsidiary Banks are small in
terms of assets and deposits in comparison with the super-regional banks they
compete with in Houston and Dallas. Likewise, in Jacksonville and Fort Walton
Beach, Florida, Compass Bank-Florida encounters intense competition from other
financial institutions that are substantially larger in terms of assets and
deposits.
EMPLOYEES
At February 28, 1994, the Company and its subsidiaries had approximately
3,900 employees. The Company and its subsidiaries provide a variety of benefit
programs including group life, health, accident, and other insurance,
retirement and stock ownership plans. The Company also maintains training,
educational and affirmative action programs designed to equip employees for
positions of increasing responsibility in both management and operating
positions.
GOVERNMENT MONETARY POLICY
The Company and the Subsidiary Banks are affected by the credit policies of
monetary authorities, including the Board of Governors of the Federal Reserve
System. An important function of the Federal Reserve System is to regulate the
national supply of bank credit. Among the instruments of monetary policy used
by the Federal Reserve to implement these objectives are: open market
operations in U.S. Government securities, changes in the discount rate, reserve
requirements on member bank deposits and funds availability regulations. These
instruments are used in varying combinations to influence the overall growth of
bank loans, investments and deposits and may also affect interest rates charged
on loans or paid on deposits.
The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of financial institutions in the
past and will continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no
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prediction can be made as to the future impact that changes in interest rates,
deposit levels or loan demand may have on the business and income of the
Company and the Subsidiary Banks.
SUPERVISION AND REGULATION
THE COMPANY
The Company and Compass of Texas are multi-bank holding companies within the
meaning of the BHC Act and are registered as such with the Federal Reserve. As
bank holding companies, the Company and Compass of Texas are required to file
with the Federal Reserve an annual report and such additional information as
the Federal Reserve may require pursuant to the Bank Holding Company Act ("BHC
Act"). The Federal Reserve may also make examinations of the Company and each
of its subsidiaries. Under the BHC Act, bank holding companies are prohibited,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than five percent of the voting shares of any company engaging in
activities other than banking or managing or controlling banks or furnishing
services to or performing services for their banking subsidiaries. However, the
BHC Act authorizes the Federal Reserve to permit bank holding companies to
engage in, and to acquire or retain shares of companies that engage in,
activities which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHC Act requires a bank holding company to obtain the prior approval of
the Federal Reserve before it may acquire substantially all of the assets of
any bank or ownership or control of any voting shares of any bank if, after
such acquisition, it would own or control, directly or indirectly, more than
five percent of the voting shares of any such bank. The BHC Act prohibits the
Federal Reserve from approving an application by a registered bank holding
company to acquire shares of a bank located outside of the state in which the
operations of the applicant's banking subsidiaries are principally conducted
unless such acquisition is specifically authorized by the laws of the state in
which the bank to be acquired is located or the acquisition involves a closed
or failed bank, which also requires special regulatory approval.
The States of Alabama, Florida, and Texas, where the Company currently
operates banking subsidiaries, each have laws relating specifically to
acquisitions of banks, bank holding companies, and other types of financial
institutions in those states by financial institutions that are based in, and
not based in, those states. In 1986, the State of Alabama enacted a regional
reciprocal banking act. In general, the Alabama statute permits Alabama banks
and bank holding companies to be acquired by regional bank holding companies
and effectively permits Alabama banks and bank holding companies to acquire
banks located in 14 other designated jurisdictions including Texas and Florida
if such jurisdictions have adopted reciprocal statutes. Texas law currently
permits out-of-state bank holding companies to acquire banks in Texas
regardless of where the acquiror is based, subject to the satisfaction of
various conditions such as agreements with respect to compliance with state law
and evidence as to certain financial matters.
Florida's regional reciprocal banking act, enacted in 1984, permits
acquisitions of banks and bank holding companies in Florida by financial
institutions based in 13 designated jurisdictions other than Florida including
Alabama, but not Texas. As a result of acquisitions in Texas which had the
effect of increasing its consolidated deposits outside of Florida's region, the
Company does not meet the definition of a regional bank holding company under
Florida law. Therefore, in order to complete certain acquisitions in Florida,
the Company established a Florida subsidiary federal savings bank into which
the Company merged the banks which it had agreed to acquire. Unless there is
additional growth by the Company within Florida's region or a change in
governing statutes at the state or federal level, the Company anticipates that
any Florida banks or other financial institutions that are acquired by it in
the future will be acquired as part of the Company's federal savings bank in
Florida.
Because the laws of the states designated in Alabama's and Florida's regional
reciprocal banking statutes are not uniform, there is an absence of complete
symmetry with respect to the permissibility of interstate expansion in Alabama,
Florida, Texas and other states in which the Company may in the future seek to
undertake acquisitions. Unless and until federal or state legislation is
enacted which permits nationwide interstate acquisitions of banks,
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bank holding companies, and other types of financial institutions, the Company
may encounter various restrictions and limitations with respect to acquisitions
outside of the States of Alabama and Texas by virtue of state laws relating to
interstate expansion.
The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or the furnishing of services.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") enacted major regulatory reforms, stronger capital standards for
savings associations and stronger civil and criminal enforcement provisions.
FIRREA allows the acquisition of healthy and failed savings associations by
bank holding companies and imposes no interstate barriers on such bank holding
company acquisitions. With certain qualifications, FIRREA also allows bank
holding companies to merge acquired savings and loans into their existing
commercial bank subsidiaries. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.
In December, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted. This act recapitalized the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF"), of which the
Subsidiary Banks are members, substantially revised statutory provisions,
including capital standards, restricted certain powers of state banks, gave
regulators the authority to limit officer and director compensation and
required holding companies to guarantee the capital compliance of their banks
in certain instances. Among other things, FDICIA requires the federal banking
agencies to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. FDICIA established five capital tiers: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized", as defined by regulations
adopted by the Federal Reserve, the FDIC and the other federal depository
institution regulatory agencies. A depository institution is well capitalized
if it significantly exceeds the minimum level required by regulation for each
relevant capital measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in
the regulations. The critical capital level must be a level of tangible equity
capital equal to not less than 2 percent of total tangible assets and not more
than 65 percent of the minimum leverage ratio to be prescribed by regulation
(except to the extent that 2 percent would be higher than such 65 percent
level). An institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
If a depository institution fails to meet regulatory capital requirements,
the regulatory agencies can require submission and funding of a capital
restoration plan by the institution, place limits on its activities, require
the raising of additional capital and, ultimately, require the appointment of a
conservator or receiver for the institution. The obligation of a controlling
bank holding company under FDICIA to fund a capital restoration plan is limited
to the lesser of 5 percent of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. If the controlling
bank holding company fails to fulfill its obligations under FDICIA and files
(or has filed against it) a petition under the Federal Bankruptcy Code, the
FDIC's claim may be entitled to a priority in such bankruptcy proceeding over
third party creditors of the bank holding company.
An insured depository institution may not pay management fees to any person
having control of the institution nor may an institution, except under certain
circumstances and with prior regulatory approval, make any capital distribution
(including the payment of dividends) if, after making such payment or
distribution, the institution would be undercapitalized. FDICIA also restricts
the acceptance of brokered deposits by insured depository institutions
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and contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts.
At December 31, 1993, the Subsidiary Banks were "well capitalized", and were
not subject to any of the foregoing restrictions, including, without
limitation, those relating to brokered deposits. The Subsidiary Banks do not
rely upon brokered deposits as a primary source of deposit funding, although
such deposits are sold through the Correspondent and Investment Services
Division of Compass Bank.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy. In addition, FDICIA requires the FDIC to establish a system
of risk-based assessments for federal deposit insurance, by which banks that
pose a greater risk of loss to the FDIC (based on their capital levels and the
FDIC's level of supervisory concern) will pay a higher insurance assessment.
THE SUBSIDIARY BANKS
In general, federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including reserves, loans,
mortgages, capital, issuances of securities, payment of dividends and
establishment of branches. Federal and state banking regulatory agencies also
have the general authority to limit the dividends paid by insured banks and
bank holding companies if such payments may be deemed to constitute an unsafe
and unsound practice. Federal and state banking agencies also have authority to
impose penalties, initiate civil and administrative actions and take other
steps intended to prevent banks from engaging in unsafe or unsound practices.
Compass Bank, organized under the laws of the State of Alabama, is a member
of the Federal Reserve System. As such, it is supervised, regulated and
regularly examined by the Alabama State Banking Department and the Federal
Reserve. Compass Bank, N.A. is a national banking association and Compass Bank-
Florida is a federal savings bank which are subject to supervision, regulation
and examination by the Office of the Comptroller of the Currency ("OCC") and
the Office of Thrift Supervision ("OTS"), respectively. Compass Bank-Houston
and Compass Bank-Dallas, both of which are organized under the laws of the
State of Texas, are state banks that are not members of the Federal Reserve
System. The Texas banks are supervised, regulated and regularly examined by the
Department of Banking of the State of Texas and the FDIC. The Subsidiary Banks,
as participants in the BIF and the SAIF of the FDIC, are subject to the
provisions of the Federal Deposit Insurance Act and to examination by and
regulations of the FDIC. (See "Supervision and Regulation--Implications of
Being a Savings and Loan Holding Company".)
Compass Bank is governed by Alabama laws restricting the declaration and
payment of dividends to 90 percent of annual net income until its surplus funds
equal at least 20 percent of capital stock. Compass Bank has surplus in excess
of this amount. Compass Bank-Houston and Compass Bank-Dallas, governed by the
laws of the State of Texas, are, under certain circumstances, restricted in the
declaration and payment of dividends to the extent that before declaring any
dividends, each of these banks must transfer to its "certified surplus"
accounts an amount not less than 10 percent of the net profits of such bank
earned since the last dividend was declared, except that there is no
requirement for a transfer to certified surplus of a sum which would increase
the certified surplus to more than the capital stock of the respective bank. In
addition, Compass Bank-Houston has entered into an agreement with the
Commissioner of the Department of Banking of the State of Texas that it will
not declare dividends in excess of 50 percent of its current earnings. The
approval of the OCC is required if the total of all dividends declared by
Compass Bank, N.A. in any calendar year exceeds the total of the net profits
for that year, plus its retained net profits for the preceding two years, less
any required transfers to surplus. As a member of the Federal Reserve System,
Compass Bank is also subject to dividend limitations imposed by the Federal
Reserve that are similar to those applicable to national banks. (See
"Supervision and Regulation--Implications of Being a Savings and Loan Holding
Company".)
Federal law further provides that no insured depository institution may make
any capital distribution, including a cash dividend, if, after making the
distribution, the institution would not satisfy one or more of its
6
minimum capital requirements. Moreover, the federal bank regulatory agencies
also have the general authority to limit the dividends paid by insured banks if
such payments may be deemed to constitute an unsafe and unsound practice.
Insured banks are prohibited from paying dividends on its capital stock while
in default in the payment of any assessment due to the FDIC except in those
cases where the amount of the assessment is in dispute and the insured bank has
deposited satisfactory security for the payment thereof.
The Community Reinvestment Act of 1977 ("CRA") and the regulations of the
OCC, the Federal Reserve and the FDIC implementing that act are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will assess the records of regulated financial
institutions in satisfying their continuing and affirmative obligations to help
meet the credit needs of their local communities as part of their regulatory
examination of the institution. The results of such examinations are made
public and are taken into account upon the filing of any application to
establish a domestic branch or to merge or to acquire the assets or assume the
liabilities of a bank. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction. The
bank regulatory agencies have announced a proposal to revise the regulations
implementing the CRA. The proposal contemplates extensive changes to the
existing procedures for determining compliance with the CRA and the full effect
of the proposed regulations cannot be determined at this time.
IMPLICATIONS OF BEING A SAVINGS AND LOAN HOLDING COMPANY
As a result of the Company's ownership of a federal savings bank
headquartered in Florida, the Company is a savings and loan holding company
under Section 10 of the Home Owners' Loan Act, as amended ("HOLA").
Accordingly, the Company has registered with the OTS and is subject to OTS
regulations, supervision and reporting requirements.
With certain exceptions, a savings and loan holding company must obtain the
prior written approval of the OTS before acquiring control of an insured
savings association or savings and loan holding company through the acquisition
of stock or through a merger or some other business combination. HOLA prohibits
the OTS from approving an acquisition by a savings and loan holding company
which would result in the holding company controlling savings associations in
more than one state unless (i) the holding company is authorized to do so by
the FDIC as an emergency acquisition, (ii) the holding company controls a
savings association which operated an office in the additional state or states
on March 5, 1987, or (iii) the statutes of the state in which the savings
association to be acquired is located specifically permit a savings association
chartered by such state to be acquired by an out-of-state savings association
or savings and loan holding company.
As a subsidiary of a savings and loan holding company, Compass Bank-Florida
is subject to certain restrictions in its dealings with the Company and with
other companies affiliated with the Company. In addition, savings association
subsidiaries of savings and loan holding companies are required to give the OTS
thirty days' prior notice of any proposed payment of dividends to the savings
and loan holding company.
Compass Bank-Florida is subject to the capital adequacy guidelines of the
OTS. In general, a federal savings bank is required to satisfy three capital
requirements: (i) a leverage ratio, (ii) a Tier 1 (core) risk-based capital
ratio, and (iii) a total qualifying capital ratio. To be adequately capitalized
under the fully phased-in capital requirements for January 1, 1995, an
institution must meet or exceed (i) a leverage ratio of 4 percent, or a
leverage ratio of 3 percent if the institution received the top rating in its
most recent examination, (ii) a Tier 1 (core) risk-based capital ratio of 4
percent, and (iii) a total qualifying capital ratio of 8 percent.
In general, a savings and loan holding company that has a federal savings
bank subsidiary that fails to meet the "qualified thrift lender" test is
required to become a bank holding company. In addition, if a federal savings
bank does not satisfy the "qualified thrift lender" test, then such federal
savings bank must either convert to a
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bank or it (i) will be limited to establishing new branches as if it were a
national bank located in the same state, (ii) will be barred from obtaining new
Federal Home Loan Bank ("FHLB") advances, (iii) will be prohibited from making
any new investment or engaging in any new activity unless the investment or
activity is permitted for a national bank, and (iv) will be subject to the
dividend restrictions applicable to national banks. Moreover, three years after
it has failed to qualify as a "qualified thrift lender", a federal savings bank
must (i) divest any investments and activities not permitted for a national
bank and (ii) repay any of its outstanding Federal Home Loan Bank advances "as
promptly as can prudently be done" consistent with its safe and sound operation
and must divest any investment and cease any activity not permitted for a
national bank. Should a federal savings bank subsidiary of the Company fail the
"qualified thrift lender" test, that institution might be required to convert
to a bank and the Company's ability to retain it would be subject to question
in light of Florida law which does not now authorize the Company to acquire a
bank in that state.
To be a "qualified thrift lender" a federal savings bank must maintain
"qualified thrift investments" of at least 65 percent of its "portfolio assets"
as measured on a monthly average basis in nine out of the last twelve months.
The assets that qualify as "qualified thrift investments" include assets
generally related to the development of domestic residential (and other) real
property. "Portfolio assets" is defined as a federal savings bank's total
assets, minus (i) goodwill and other intangible assets, (ii) the value of
property used by the savings associations to conduct its business, and (iii)
subject to a maximum of 20 percent of total assets, liquid assets required to
be maintained under Section 6 of HOLA.
OTHER
Other legislative and regulatory proposals regarding changes in banking, and
the regulation of banks, thrifts and other financial institutions, are being
considered by the executive branch of the Federal government, Congress and
various state governments, including Alabama, Texas and Florida. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. It cannot be predicted accurately whether
any of these proposals will be adopted or, if adopted, how these proposals will
affect the Company or the Subsidiary Banks.
The Correspondent and Investment Services Division of Compass Bank is treated
as a municipal securities dealer and a government securities dealer for
purposes of the federal securities laws, and, therefore, is subject to certain
reporting requirements and/or regulatory controls by the Securities and
Exchange Commission (the "Commission"), the United States Department of the
Treasury and the Federal Reserve. Compass Brokerage, Inc. is a discount
brokerage service registered with the Commission and the National Association
of Securities Dealers, Inc. and is subject to certain reporting requirements
and regulatory control by these agencies. Compass Bancshares Insurance, Inc. is
a licensed insurance agent or broker for various insurance companies and is
subject to reporting and licensing regulations of the Alabama Insurance
Commission.
References to applicable statutes under the heading "Supervision and
Regulation" are brief summaries of portions thereof, do not purport to be
complete and are qualified in their entirety by reference to such statutes.
8
ITEM 1--STATISTICAL DISCLOSURE
PAGE(S)
-------
Consolidated Average Balances, Interest Income/Expense and
Yields/Rates.......................................................... 26 & 27
Rate/Volume Variance Analysis.......................................... 28 & 29
Investment Securities and Investment Securities Available for Sale..... 15
Investment Securities and Investment Securities Available for Sale Ma-
turity Schedule....................................................... 15
Loan Portfolio......................................................... 13
Selected Loan Maturity and Interest Rate Sensitivity................... 14
Nonperforming Assets................................................... 33
Summary of Loan Loss Experience........................................ 31
Allocation of Allowance for Loan Losses................................ 32
Maturities of Time Deposits............................................ 16
Return on Equity and Assets............................................ 23
Short-Term Borrowings.................................................. 17
Interest Rate Sensitivity Analysis..................................... 19
Interest Rate Protection Contracts..................................... 21
Interest Rate Contracts--Trading Account............................... 21
Leverage Ratio Calculations............................................ 23
Noninterest Income..................................................... 34
Noninterest Expense.................................................... 35
9
ITEM 2--PROPERTIES
The Company, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. The principal executive offices of the
Company are located at 15 South 20th Street, Birmingham, Alabama, in a 317,000
square-foot office building. During 1990, the Company entered into an agreement
with the University of Alabama at Birmingham Medical and Educational Foundation
("UAB") and Daniel Properties III Limited Partnership which, during 1991,
resulted in UAB acquiring the Company's former headquarters building and the
Company acquiring its current headquarters building. The Company occupied its
current headquarters in August, 1993, while maintaining a full service bank
facility at its former headquarters site.
The Subsidiary Banks own or lease various other offices and facilities in
Alabama, Florida and Texas, with remaining lease terms of 1 to 20 years,
exclusive of renewal options. In addition, the Company owns a 300,000 square-
foot administrative headquarters facility completed in early 1988 and the River
Oaks Bank Building in Houston, Texas, a 14-story, 168,000 square-foot office
building. The River Oaks Bank Building is 34 percent occupied by Compass Bank-
Houston and River Oaks Trust Company. The remaining space is leased to multiple
tenants. See "Summary of Significant Accounting Policies" and "Notes to
Consolidated Financial Statements" for information with respect to the amounts
at which bank premises, equipment and other real estate are carried and
information relating to commitments under long-term leases.
ITEM 3--LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings other than ordinary routine litigation incidental to
its business.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 19, 1993, the shareholders of the Company approved the change in
the name of the Company from Central Bancshares of the South, Inc. to Compass
Bancshares, Inc. With respect to the vote, 26,252,104 shares of the Company's
common stock were voted in favor of the name change, 150,958 shares were voted
against the change, and 224,482 shares abstained.
10
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low closing prices of the common
stock of the Company in the national over-the-counter market and the dividends
paid thereon during the periods indicated. The prices shown do not reflect
retail mark-ups, mark-downs, or commissions. All share prices have been rounded
to the nearest 1/8 of one dollar and all share prices and dividends per share
prior to the third quarter of 1992 have been restated to take into account the
3-for-2 stock split with respect to the Company's common stock, which was
effected by a stock dividend paid on July 2, 1992.
HIGH LOW DIVIDEND
------- ------- --------
1993:
FIRST QUARTER........................................ $25 3/4 $22 1/2 $.19
SECOND QUARTER....................................... 26 1/2 22 1/2 .19
THIRD QUARTER........................................ 26 23 1/2 .19
FOURTH QUARTER....................................... 25 20 3/4 .19
1992:
First quarter........................................ $21 1/8 $18 1/2 $.1667
Second quarter....................................... 23 3/8 19 1/2 .1667
Third quarter........................................ 23 1/2 18 1/2 .1667
Fourth quarter....................................... 23 1/2 19 1/4 .1667
As of February 28, 1994, there were 5,901 shareholders of record of common
stock of which 5,010 were residents of either Alabama, Texas or Florida.
ITEM 6--SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years. All per share information for periods prior to July, 1992, has been
restated to reflect the 3-for-2 stock split with respect to the Company's
common stock, which was effected by a stock dividend paid on July 2, 1992.
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net interest income..... $ 325,264 $ 313,334 $ 254,621 $ 196,455 $ 165,690
Provision for loan loss-
es..................... 35,985 52,885 37,964 23,864 24,543
Net income.............. 89,260 75,390 62,784 52,082 43,341
Per common share data:
Net income............ $ 2.39 $ 2.01 $ 1.74 $ 1.52 $ 1.24
Cash dividends de-
clared............... .76 .667 .587 .533 .513
Balance sheet:
Average total equity.. $ 533,526 $ 477,891 $ 405,910 $ 343,964 $ 318,513
Average assets........ 7,047,256 6,737,664 6,068,112 5,240,192 4,733,509
Period-end FHLB and
other borrowings..... 325,437 203,913 13,181 11,750 11,238
Period-end total equi-
ty................... 545,584 506,426 449,640 359,822 330,107
Period-end assets..... 7,252,341 7,004,506 6,711,945 5,485,202 4,978,766
11
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of the Company and its
subsidiaries during the past three years. The discussion and analysis is
intended to supplement and highlight information contained in the accompanying
consolidated financial statements and the selected financial data presented
elsewhere in this report. Prior year information has been restated to reflect
1993 and 1992 acquisitions accounted for using the pooling-of-interests
accounting method and prior period per share data has been restated to reflect
a 3-for-2 stock split effected through the issuance of a 50 percent stock
dividend paid in July, 1992. Financial institutions acquired by the Company
during the past three years and accounted for as purchases are reflected in the
financial position and results of operations of the Company since the date of
their acquisition.
SUMMARY
Net income for 1993 was $89 million, an 18 percent increase over the
Company's previous high of $75 million in 1992. Net income for 1992 was 20
percent higher than 1991 net income of $63 million. The increases in net income
per common share for 1993 and 1992 were 19 percent and 16 percent,
respectively. Net income per common share increased 14 percent during 1991.
Pretax income for 1993 was up $24 million or 21 percent over 1992; however,
income tax expense increased $10 million or 26 percent over the same period due
to an increase in the Company's income subject to taxation and an increase in
the effective tax rate in 1993 from 34 percent to 35 percent.
One significant factor in the growth of the Company has been the Company's
acquisitions in Texas, specifically the Houston and Dallas areas, since late
1987. The Texas expansion continued throughout 1993 and is expected to continue
in 1994. Management expects the asset size of the Texas operations to continue
to increase from the December 31, 1993 level of $1.9 billion. In addition, the
Company has been able to expand its operations in north Florida and will seek
to continue to increase its presence in that market in 1994. For additional
information, see "Acquisitions" and "Pending Acquisitions" in Part I of this
report and the accompanying "Notes to the Consolidated Financial Statements,"
Note 10, Mergers and Acquisitions.
EARNING ASSETS
Average earning assets in 1993 increased five percent over 1992 due to
increases in both average loans and trading account securities. The average
earning asset mix continued to change during 1993 with loans at 74 percent,
investment securities and investment securities available for sale at 22
percent and other earning assets at 4 percent of the total. In 1992, loans were
68 percent, investment securities and investment securities available for sale
29 percent and other earning assets 3 percent. The mix of earning assets during
1993 and 1992 contributed to the higher net interest income. The mix of earning
assets is monitored on a continuous basis in order to react to favorable
interest rate movements and to maximize return on earning assets.
Average loans increased 14 percent in 1993 with much of the increase
concentrated in residential mortgage loans, commercial loans and consumer
installment loans. Total loans outstanding at year-end increased 11 percent
over previous year-end levels. The growth in the portfolio resulted from the
Company's ongoing efforts to increase the loan portfolio through the
origination of loans. Real estate construction loans increased 7 percent,
residential mortgage loans increased 30 percent, commercial mortgage loans
increased 1 percent and consumer installment loans decreased 1 percent from
year-end 1992 to year-end 1993. Commercial, financial and agricultural loans,
which were 22 percent of total loans in 1993, increased 7 percent compared to
the previous year. Residential real estate lending increased due to a rise in
demand for such loans, particularly due to the Company's introduction of
variable rate residential mortgage loans with low introductory rates in the
fourth quarter of 1992. Residential mortgage loans as a percentage of total
loans increased from 32 percent at year-end 1992 to 37 percent at year-end
1993. The 17 percent increase in the Company's loan portfolio from 1991 to 1992
occurred primarily in residential mortgage loans which increased 44 percent.
The Company's loan portfolio continues to reflect the diversity of the
markets served by the Subsidiary Banks. The condition of the economy in states
in which the Subsidiary Banks lend money is further reflected in the loan
12
portfolio mix. There has been a decline in the volume of commercial, financial
and agricultural loans and real estate construction loans, as a percentage of
total loans outstanding, for the past five years. This shift is reflective of
the general state of the economy in the markets served, specifically, the
softening of the demand for commercial real estate loans in those markets. With
fewer attractive lending opportunities in the commercial lending arena, other
lending opportunities were sought and brought about the increases in the other
categories within the portfolio. Specifically, the Company experienced an eight
percent increase in its indirect auto loan portfolio from 1992 to 1993. At
December 31, 1993, the Company's indirect loan portfolio, consisting primarily
of indirect automobile loans, represented 15 percent of total loans
outstanding.
The Company has not invested in loans that would be considered highly
leveraged transactions ("HLT") as defined by the Federal Reserve Board and
other regulatory agencies. The Company also had no significant foreign loans or
loans to lesser developed countries as of December 31, 1993.
The Loan Portfolio table shows the classifications of loans by major category
at December 31, 1993, and for each of the preceding four years. The second
table shows maturities of certain loan classifications at December 31, 1993,
and an analysis of the rate structure for such loans due in over one year.
LOAN PORTFOLIO
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------------- ------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS)
...................
Commercial,
financial and
agricultural......... $1,125,633 21.8% $1,051,461 22.7% $ 969,666 24.6% $ 917,796 26.6% $ 887,064 28.5%
Real estate--
construction......... 251,343 4.9 234,160 5.1 200,510 5.1 296,874 8.6 330,652 10.6
Real estate--
mortgage:
Residential.......... 1,897,908 36.8 1,462,339 31.6 1,016,837 25.7 790,342 22.9 651,121 21.0
Commercial........... 724,212 14.1 715,203 15.4 708,494 17.9 537,409 15.5 539,023 17.3
Consumer
installment.......... 1,151,281 22.4 1,168,240 25.2 1,054,688 26.7 913,601 26.4 702,090 22.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
5,150,377 100.0% 4,631,403 100.0% 3,950,195 100.0% 3,456,022 100.0% 3,109,950 100.0%
===== ===== ===== ===== =====
Less: Unearned
income........ 1,891 3,873 6,163 6,997 2,799
Allowance for
loan losses... 110,036 83,352 55,561 42,366 37,380
---------- ---------- ---------- ---------- ----------
Total loans........... $5,038,450 $4,544,178 $3,888,471 $3,406,659 $3,069,771
========== ========== ========== ========== ==========
13
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
----------------------------------------- -------------------------
ONE OVER ONE YEAR OVER PREDETERMINED FLOATING OR
YEAR OR THROUGH FIVE FIVE INTEREST ADJUSTABLE
LESS YEARS YEARS TOTAL RATE RATE
-------- ------------- ------- ---------- ------------- -----------
(IN THOUSANDS)
Commercial, financial
and agricultural....... $774,561 $312,143 $38,929 $1,125,633 $112,012 $239,060
Real estate--construc-
tion................... 180,421 54,887 16,035 251,343 22,026 48,896
-------- -------- ------- ---------- -------- --------
$954,982 $367,030 $54,964 $1,376,976 $134,038 $287,956
======== ======== ======= ========== ======== ========
On December 31, 1993, the Company adopted Financial Accounting Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities
("FAS115") which requires that a company's debt and equity securities be
classified based on management's intent to hold the securities into one of
three categories: (i) trading account securities, (ii) held-to-maturity
securities, or (iii) securities available for sale. Securities held in a
trading account are required to be reported at fair value, with unrealized
gains and losses included in earnings. Securities designated to be held to
maturity are reported at amortized cost. Securities classified as available for
sale are required to be reported at fair value with unrealized gains and
losses, net of taxes, excluded from earnings and shown separately as a
component of shareholder's equity. Previously, the Company's accounting
policies regarding trading account securities and held-to-maturity securities
were the same as those prescribed by FAS115. During all periods up to the date
of adoption, the Company reported securities available for sale at the lower-
of-cost-or-market with any valuation adjustment reflected in earnings as
required by generally accepted accounting principles at that time. FAS115 is
effective for fiscal years beginning after December 15, 1993 with earlier
adoption at December 31, 1993 permitted. The Company elected to adopt FAS115
prior to its effective date. At December 31, 1993, net unrealized gains in the
Company's available-for-sale portfolio totaled $10.4 million. Under the
requirements of FAS115, the tax-effected unrealized gain of $6.5 million has
been reflected as additional shareholders' equity.
The composition of the Company's total investment securities portfolio
reflects the Company's investment strategy of maximizing portfolio yields
commensurate with risk and liquidity considerations. The primary objectives of
the Company's investment strategy are to maintain an appropriate level of
liquidity and provide a tool to assist in controlling the Company's interest
rate position while at the same time producing adequate levels of interest
income. For securities classified as held-to-maturity, the Company has the
ability, and it is management's intention, to hold such securities to maturity.
Management of the maturity of the portfolio is necessary to provide liquidity
and to control interest rate risk. Certain securities that may be sold prior to
maturity are reflected as investment securities available for sale on the
Company's balance sheet. During 1992, the Company transferred approximately
$566 million of investment securities from its held-to-maturity portfolio to
the available-for-sale classification. With the adoption of FAS115 on December
31, 1993, the Company transferred an additional $58 million of investment
securities to its available-for-sale portfolio. The transfer primarily involved
fixed-rate CMOs that could be required to be transferred to the available-for-
sale portfolio by Federal regulators in the future if sufficiently reduced
prepayment speeds are experienced on the underlying mortgages. During 1993 and
1992, gross sales of held-to-maturity securities were $40 million and $54
million, respectively, while maturities totaled $435 million and $695 million,
respectively. Sales and maturities of securities available for sale totaled $57
million and $252 million, respectively, in 1993 while sales in 1992 were $5
million. Gains associated with the sales were immaterial, accounting for less
than one percent of noninterest income. Gross unrealized gains in the Company's
held-to-maturity portfolio amounted to $28 million at year-end 1993 and gross
unrealized losses amounted to $1 million.
In recent years, the trend of the Company has been to invest in taxable
securities due to the lack of preferential treatment afforded tax-exempt
securities under the tax laws. Because of their liquidity, credit quality and
yield characteristics, the majority of the purchases of taxable securities have
been in mortgage-backed obligations. Total average investment securities,
including those available for sale, decreased 21 percent during 1993 after
increasing 9 percent from 1991. Total investment securities, including those
available for sale, at December 31, 1993, decreased 26 percent from year-end
1992.
14
The following table contains the carrying amount of the investment securities
portfolio at the end of each of the last three years.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE
DECEMBER 31,
--------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Investment securities:
U.S. Treasury................................ $ 2,014 $ 37,640 $ 319,874
U.S. Government agencies and corporations.... 409,294 816,500 1,235,737
States and political subdivisions............ 107,280 151,961 167,027
Other........................................ 71,281 97,519 250,689
---------- ---------- ----------
589,869 1,103,620 1,973,327
---------- ---------- ----------
Investment securities available for sale:
U.S. Treasury................................ 254,973 292,216 --
U.S. Government agencies and corporations.... 277,730 177,096 --
Other........................................ 96,677 91,244 --
---------- ---------- ----------
629,380 560,556 --
Unrealized gain.............................. 10,421 -- --
---------- ---------- ----------
639,801 560,556 --
---------- ---------- ----------
Total........................................ $1,229,670 $1,664,176 $1,973,327
========== ========== ==========
The maturities and weighted average yields of the investment securities and
investment securities available for sale at the end of 1993 are presented in
the following table using primarily the average expected lives including the
effects of prepayments. The amounts and yields disclosed for investment
securities available for sale reflect the amortized cost rather than the net
carrying value, i.e., market value, of these securities. While the average
stated maturity of the mortgage-backed securities was 17.9 years, the weighted
average expected life assumed in the table is 5.4 years. The weighted average
expected life of investment securities at December 31, 1993, was 4.0 years with
a weighted average yield of 8.74 percent. The weighted average expected life of
investment securities available for sale was 5.5 years with a weighted average
yield of 5.24 percent. Taxable equivalent adjustments, using a 35 percent tax
rate, have been made in calculating yields on tax-exempt obligations.
INVESTMENT SECURITIES AND INVESTMENT SECURITIES AVAILABLE FOR SALE MATURITY
SCHEDULE
MATURING
----------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
-------------- ------------------- ------------------ --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ----- ---------- -------- ---------- ------- -------- -----
(IN THOUSANDS)
Investment securities:
U.S. Treasury......... $ 2,014 6.45% -- -- -- -- -- --
U.S. Government agen-
cies and corpora-
tions................ 83,682 8.84 $ 268,953 8.61% $ 56,189 8.59% $ 470 4.13%
States and political
subdivisions......... 15,093 9.19 15,042 9.26 18,531 8.82 58,614 9.46
Other................. 13,987 8.40 32,255 9.83 21,912 7.01 3,127 6.96
-------- ---------- ---------- --------
114,776 8.79 316,250 8.76 96,632 8.28 62,211 9.30
-------- ---------- ---------- --------
Investment securities
available for sale--am-
ortized cost:
U.S. Treasury......... 43,632 6.19 210,900 5.57 -- -- 441 10.88
U.S. Government agen-
cies and corpora-
tions................ 40,595 7.38 38,578 5.56 25,387 4.35 173,170 4.34
Other................. 22,105 5.89 62,431 4.68 -- -- 12,141 4.15
-------- ---------- ---------- --------
106,332 6.57 311,909 5.39 25,387 4.35 185,752 4.35
-------- ---------- ---------- --------
Total............... $221,108 7.73 $ 628,159 7.09 $ 122,019 7.46 $247,963 5.59
======== ========== ========== ========
15
Securities carried in the trading account, while interest bearing, are held
primarily for sale. The volume of activity is directly related to general
market conditions and reactions to the changing interest rate environment. The
average balance in the trading account portfolio for 1993 increased by 74
percent following a 5 percent decrease in 1992.
Average federal funds sold and securities purchased under agreements to
resell increased 29 percent in 1993 from 1992 levels compared to a 40 percent
decrease in 1992 from 1991. The average balance of interest bearing deposits in
other banks decreased 13 percent during 1993 from 1992 levels after decreasing
42 percent from 1991 to 1992. There were no foreign time deposits as of
December 31, 1993 or 1992.
DEPOSITS AND SHORT-TERM BORROWINGS
Changes in the Company's markets and the economy in general were also
reflected in the liability mix during 1993. The portion of average interest
bearing liabilities represented by interest bearing deposits, the primary
source of funding for the Company, remained unchanged from 79 percent in 1992
and 1991. Year-end deposit balances increased four percent in 1993 and six
percent in 1992. Falling interest rates during the three years ended December
31, 1993, had a greater impact on the composition of the deposit base than on
the aggregate amount of deposits outstanding. As a result of falling rates, the
Company was able to restructure the mix of deposits toward more consumer-
oriented, lower-cost sources of funds.
During 1993, the average balance of demand deposits and savings accounts
increased by $292 million while the average balance of certificates of deposit
and other time deposits declined by $41 million. The largest dollar increase in
average interest bearing deposits was in demand deposits, rising $104 million
or 20 percent from 1992. Average noninterest bearing demand deposits increased
$112 million, or 11 percent, after increasing 21 percent during 1992 and 1991.
The increase during 1993 was due primarily to internally generated growth with
a portion of the increase due to the Company's Florida acquisitions while the
increase in 1992 was due solely to internally generated growth. Savings
deposits, interest bearing demand deposits, and noninterest bearing demand
deposits accounted for 63 percent of total average deposits during 1993. For
1992, these lower cost deposits equaled 61 percent of all deposits. Total
average time deposits, including certificates of deposit over $100,000, were
approximately $2.0 billion in 1992 and 1993 with the large certificates of
deposit representing 24 percent of the total during both periods. The
maturities of certificates of deposit of $100,000 or more and other time
deposits of $100,000 or more issued by the Company at December 31, 1993, are
summarized in the following table:
MATURITIES OF TIME DEPOSITS
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS
OVER OVER
$100,000 $100,000 TOTAL
------------ ---------- --------
(IN THOUSANDS)
Three months or less.......................... $321,963 $14,471 $336,434
Over three through six months................. 70,862 8,688 79,550
Over six through twelve months................ 39,251 -- 39,251
Over twelve months............................ 136,820 1,127 137,947
-------- ------- --------
$568,896 $24,286 $593,182
======== ======= ========
Borrowed funds consist of short-term borrowings, primarily in the form of
federal funds purchased, securities sold under agreements to repurchase, other
short-term borrowings, and FHLB and other borrowings. Average federal funds
purchased declined 34 percent during 1993 and average securities sold under
agreements to repurchase declined 11 percent. Average other short-term
borrowings, which include parent company commercial paper and trading account
short sales, increased 9 percent. The average balance of FHLB and other
borrowings increased during 1993 due to additional borrowings of $75 million of
subordinated debentures issued in the second quarter and $48 million in FHLB
advances in the third quarter of the year.
16
The Short-Term Borrowings table shows the distribution of the Company's
short-term borrowed funds and the weighted average interest rates thereon at
the end of each of the last three years. Also provided are the maximum
outstanding amounts of borrowings, the average amounts of borrowings and the
average interest rates at year-end for the last three years.
SHORT-TERM BORROWINGS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
MAXIMUM AVERAGE
OUTSTANDING AVERAGE INTEREST
AT ANY AVERAGE INTEREST ENDING RATE AT
MONTH-END BALANCE RATE BALANCE YEAR-END
----------- ---------- -------- ---------- --------
(IN THOUSANDS)
1993
- ----
FEDERAL FUNDS PURCHASED.... $ 499,390 $ 409,031 3.05% $ 414,704 2.99%
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE.. 267,630 238,234 2.81 205,707 2.56
SHORT SALES................ 34,660 23,546 4.28 25,656 4.10
COMMERCIAL PAPER........... 118,073 80,126 3.15 62,858 3.05
OTHER SHORT-TERM
BORROWINGS................ 203,569 104,403 3.24 82,500 3.26
---------- ---------- ----------
$1,123,322 $ 855,340 $ 791,425
========== ========== ==========
1992
- ----
Federal funds purchased.... $ 875,685 $ 617,692 3.53% $ 543,605 2.98%
Securities sold under
agreements to repurchase.. 341,953 266,972 3.36 232,247 2.92
Short sales................ 63,115 29,309 5.75 23,970 5.22
Commercial paper........... 88,910 70,332 3.62 34,302 3.26
Other short-term
borrowings................ 160,810 91,927 3.80 74,059 3.21
---------- ---------- ----------
$1,530,473 $1,076,232 $ 908,183
========== ========== ==========
1991
- ----
Federal funds purchased.... $ 670,975 $ 461,546 5.53% $ 669,975 3.94%
Securities sold under
agreements to repurchase.. 534,636 403,030 5.45 353,466 3.96
Short sales................ 65,136 40,201 7.38 20,128 5.41
Commercial paper........... 74,037 46,005 5.47 34,414 3.96
Other short-term
borrowings................ 62,809 40,522 5.66 62,809 4.13
---------- ---------- ----------
$1,407,593 $ 991,304 $1,140,792
========== ========== ==========
LIQUIDITY MANAGEMENT
Liquidity is the ability of a bank to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Company's
ability to meet the day-to-day cash flow requirements of the Subsidiary Banks'
customers, whether they are depositors wishing to withdraw funds or borrowers
requiring funds to meet their credit needs. Without proper liquidity
management, the Subsidiary Banks would not be able to perform the primary
function of a financial intermediary and would, therefore, not be able to meet
the needs of the communities they serve.
Asset and liability management functions not only to assure adequate
liquidity in order for the Subsidiary Banks to meet the needs of their
customers, but also to maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities so that the Company can
also meet the investment requirements of its shareholders. Daily monitoring of
the sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In a banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis.
17
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of investment securities available for sale and trading account
securities. Installment loan payments are becoming an increasingly important
source of liquidity for the Subsidiary Banks as this portfolio continues to
grow. Real estate construction and commercial, financial and agricultural loans
that mature in one year or less amounted to $955 million or 19 percent of the
total loan portfolio at December 31, 1993. Investment securities and investment
securities available for sale maturing in the same time frame totaled $221
million or 18 percent of the investment securities portfolio at year-end 1993.
Other short-term investments such as federal funds sold, securities purchased
under agreements to resell and maturing interest bearing deposits with other
banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and noninterest bearing deposit accounts. Federal
funds purchased, securities sold under agreements to repurchase and other
short-term borrowings are additional sources of liquidity and basically
represent the Company's incremental borrowing capacity. These sources of
liquidity are short-term in nature and are used as necessary to fund asset
growth and meet short-term liquidity needs.
As disclosed in the Company's Consolidated Statement of Cash Flows, net cash
provided by operating activities decreased $142 million primarily due to the
substantial increase in trading account securities of $133 million and the
increase in mortgage loans held for sale of $16 million offset to some extent
by the increase in net income. Net cash used in investing activities of $34
million consisted primarily of net loans originated of $389 million and held-
to-maturity securities and available-for-sale securities purchased of $34
million and $285 million, respectively, funded in part by maturities and
paydowns of investment securities held to maturity and investment securities
available for sale of $435 million and $252 million, respectively. This overall
decrease in the Company's investment securities portfolios was due to
management's continued efforts to reinvest funds in higher-yielding loans
rather than in investment securities. Net cash provided by financing activities
provided the remainder of funding sources for 1993. The $10 million of net cash
provided consisted primarily of a $61 million net increase in deposits, a net
increase of $119 million in FHLB and other borrowings, and a $39 million
increase in other short-term borrowings offset partially by a reduction of $155
million in federal funds purchased and securities sold under agreements to
repurchase. The increase in FHLB and other borrowings in 1993 consisted of $75
million of subordinated debentures issued by the Company during the second
quarter of the year along with additional FHLB advances of $48 million.
Additional cash used in financing activities included the September, 1993
redemption of all of the Company's preferred stock for $26 million, the payment
of common stock dividends of $28 million, and the payment of $2 million in
preferred stock dividends.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest bearing assets
and liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons:
immediate, 1 to 3 months, 4 to 12 months, 1 to 5 years and over 5 years and
non-rate sensitive. The differences are known as interest sensitivity gaps. The
following table shows interest sensitivity gaps for these different intervals
as of December 31, 1993 and 1992, including the effect of interest rate swaps,
interest rate floors, futures and other hedging instruments. Mortgage loans and
mortgage-backed securities are presented reflecting recent prepayment
experience of the Company.
18
INTEREST RATE SENSITIVITY ANALYSIS
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
OVER FIVE
ONE- FOUR- ONE- YEARS AND
THREE TWELVE FIVE NON-RATE
IMMEDIATE MONTHS MONTHS YEARS SENSITIVE TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
1993
----
EARNING ASSETS:
LOANS, NET OF UNEARNED
INCOME................. $1,268,283 $ 466,581 $1,169,736 $1,224,368 $1,019,518 $5,148,486
TAXABLE INVESTMENT
SECURITIES............. -- 80,664 201,033 150,778 48,261 480,736
TAX-EXEMPT INVESTMENT
SECURITIES............. -- 712 1,789 92,894 13,738 109,133
INVESTMENT SECURITIES
AVAILABLE FOR SALE..... -- 342,632 54,996 218,139 24,034 639,801
TRADING ACCOUNT
SECURITIES............. 239,491 -- -- -- -- 239,491
FEDERAL FUNDS SOLD AND
SECURITIES PURCHASED
UNDER AGREEMENTS TO
RESELL................. 140,043 -- -- -- -- 140,043
INTEREST BEARING
DEPOSITS WITH OTHER
BANKS.................. -- 376 9,999 -- 99 10,474
---------- ---------- ---------- ---------- ---------- ----------
TOTAL EARNING ASSETS... 1,647,817 890,965 1,437,553 1,686,179 1,105,650 6,768,164
INTEREST BEARING
LIABILITIES:
DEMAND DEPOSITS......... -- 717,534 -- -- -- 717,534
SAVINGS DEPOSITS........ -- -- 1,350,902 -- 253,606 1,604,508
CERTIFICATES OF DEPOSIT
LESS THAN $100,000 AND
OTHER TIME DEPOSITS.... -- 281,202 460,624 775,236 8,928 1,525,990
CERTIFICATES OF DEPOSIT
OF $100,000 OR MORE.... -- 321,963 110,113 134,377 2,443 568,896
FEDERAL FUNDS PURCHASED
AND SECURITIES SOLD
UNDER AGREEMENTS TO
REPURCHASE............. 599,411 -- -- -- 21,000 620,411
OTHER SHORT-TERM
BORROWINGS............. 171,014 -- -- -- -- 171,014
FHLB AND OTHER
BORROWINGS............. -- 196,039 50,123 813 78,462 325,437
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST BEARING
LIABILITIES........... 770,425 1,516,738 1,971,762 910,426 364,439 5,533,790
NONINTEREST BEARING
SOURCES OF FUNDS--NET... -- -- -- -- 1,234,374 1,234,374
---------- ---------- ---------- ---------- ---------- ----------
INTEREST SENSITIVITY
GAP................... 877,392 (625,773) (534,209) 775,753 (493,163) --
---------- ---------- ---------- ---------- ---------- ----------
CUMULATIVE INTEREST
SENSITIVITY GAP....... $ 877,392 $ 251,619 $(282,590) $ 493,163 $ -- $ --
========== ========== ========== ========== ========== ==========
1992
----
Earning assets:
Loans, net of unearned
income................. $1,080,729 $ 433,022 $1,029,672 $1,220,453 $ 863,654 $4,627,530
Taxable investment
securities............. -- 129,085 96,196 512,131 211,382 948,794
Tax-exempt investment
securities............. -- 1,916 1,436 24,044 127,430 154,826
Investment securities
available for sale..... -- 315,867 100,383 143,880 426 560,556
Trading account
securities............. 106,046 -- -- -- -- 106,046
Federal funds sold and
securities purchased
under agreements to
resell................. 57,883 -- -- -- -- 57,883
Interest bearing
deposits with other
banks.................. -- 495 293 10,088 -- 10,876
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets... 1,244,658 880,385 1,227,980 1,910,596 1,202,892 6,466,511
Interest bearing
liabilities:
Demand deposits......... -- 613,107 -- -- -- 613,107
Savings deposits........ -- -- 1,355,096 -- 235,105 1,590,201
Certificates of deposit
less than $100,000 and
other time deposits.... -- 371,413 476,685 160,166 445,912 1,454,176
Certificates of deposit
of $100,000 or more.... -- 232,317 131,730 158,157 30,956 553,160
Federal funds purchased
and securities sold
under agreements to
repurchase............. 775,852 -- -- -- -- 775,852
Other short-term
borrowings............. 132,331 -- -- -- -- 132,331
FHLB and other
borrowings............. -- 198,071 113 1,543 4,186 203,913
---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities........... 908,183 1,414,908 1,963,624 319,866 716,159 5,322,740
Noninterest bearing
sources of funds--net... -- -- -- -- 1,143,771 1,143,771
---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity
gap..................... 336,475 (534,523) (735,644) 1,590,730 (657,038) --
---------- ---------- ---------- ---------- ---------- ----------
Cumulative interest
sensitivity gap......... $ 336,475 $ (198,048) $ (933,692) $ 657,038 $ -- $ --
========== ========== ========== ========== ========== ==========
19
In the preceding interest rate sensitivity analysis tables, variable rate
commercial loans totaling $670 million and $600 million at December 31, 1993,
and 1992, respectively, have been reflected as repricing immediately even
though these loans are protected from declines in the interest rate earned due
to interest rate floors associated with such loans.
As seen in the tables, for the first 365 days 65 percent of earning asset
funding sources will reprice compared to 59 percent of all interest earning
assets. Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and
its supporting liability can vary significantly while the timing of repricing
for both the asset and the liability remains the same, thus impacting net
interest income. This characteristic is referred to as basis risk and relates
to the possibility that the repricing characteristics of short-term assets tied
to the Company's prime lending rate are different from those of short-term
funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and repricing of liabilities which are not
reflected in the interest sensitivity analysis report. These prepayments may
have significant effects on the Company's net interest margin. Because of these
factors an interest sensitivity gap report may not provide a complete
assessment of the Company's exposure to changes in interest rates. Management
utilizes computerized interest rate simulation analysis to determine the
Company's interest rate sensitivity. The above table indicates that the Company
is in a liability sensitive gap position at twelve months; however, due to the
factors cited, current simulation results indicate only minimal sensitivity to
parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.
In addition to the ongoing monitoring of interest-sensitive assets and
liabilities, the Company enters into various interest rate contracts not held
in the trading account ("interest rate protection contracts") to help manage
the Company's interest sensitivity. Such contracts generally have a fixed
notional principal amount and include (i) interest rate swaps where the Company
typically receives or pays a fixed rate and a counterparty pays or receives a
floating rate based on a specified index, (ii) interest rate caps and floors
purchased or written where the Company receives or pays, respectively, interest
if the specified index falls below the floor rate or rises above the cap rate,
and (iii) interest rate futures where the Company agrees to deliver or receive
securities or money market instruments at a designated future date and at a
specified price or yield. The interest rate risk factor in these contracts is
considered in the overall interest management strategy and the Company's
interest risk management program. The income or expense associated with
interest rate swaps, caps and floors and gains or losses in futures contracts
classified as hedges are ultimately reflected as adjustments to interest income
or expense. Changes in the estimated fair value of interest rate protection
contracts are not reflected in the financial statements until realized. A
discussion of interest rate risks, credit risks and concentrations in off-
balance sheet financial instruments is included in Note 6 of the Notes to
Consolidated Financial Statements. The following table details various
information regarding interest rate protection contracts as of December 31,
1993:
20
INTEREST RATE PROTECTION CONTRACTS
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE RATE AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED ------------- YEARS TO FREQUENCY
AMOUNT VALUE FAIR VALUE RECEIVED PAID EXPIRATION (YEARS)
---------- -------- ---------- -------- ---- ---------- ---------
(IN THOUSANDS)
Swaps:
Pay fixed........... $ 176,000 $ -- $(1,869) 3.68% 5.36% 2.93 0.23
Receive fixed....... 60,000 -- 578 6.75 3.46 1.28 0.31
Basis swaps+........ 200,000 -- (128) 3.30 3.41 2.13 0.25
Caps and floors:
Purchased........... 1,050,000 732 24,140 1.22 * 3.01 0.18
Written............. 200,000 341 1,000 * -- 2.13 0.08
---------- ------- -------
$1,686,000 $ 1,073 $23,721
========== ======= =======
- --------
+ Basis swaps represent swaps in which the Company receives interest based on a
variable interest rate index and pays interest based on a different variable
rate index.
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1993. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
In addition to interest rate protection contracts used to help manage overall
interest sensitivity, the Company also enters into interest rate contracts for
the trading account. The primary purposes for using interest rate contracts in
the trading account are to facilitate customer transactions and to help protect
cash market positions in the trading account against interest rate movement.
Changes in the estimated fair value of contracts in the trading account are
recorded in other noninterest income as trading profits and commissions. Net
interest amounts received or paid on interest rate contracts in the trading
account are recorded as an adjustment of interest on trading account
securities. The following table summarizes interest rate contracts held in the
trading account at December 31, 1993:
INTEREST RATE CONTRACTS--TRADING ACCOUNT
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE RATE AVERAGE REPRICING
NOTIONAL CARRYING ESTIMATED ------------- YEARS TO FREQUENCY
AMOUNT VALUE FAIR VALUE RECEIVED PAID EXPIRATION (YEARS)
--------- -------- ---------- -------- ---- ---------- ---------
(IN THOUSANDS)
Swaps:
Pay fixed........... $ 116,500 $ (173) $ (173) 3.40% 4.63% 2.37 0.22
Receive fixed....... 15,787 8 8 5.38 4.69 3.23 0.14
Caps and floors:
Purchased........... 200,000 5,123 5,123 1.60 * 3.21 0.24
Written............. 248,100 (2,726) (2,726) * 0.78 2.74 0.16
--------- ------- -------
Total............. $ 580,387 $ 2,232 $ 2,232
========= ======= =======
- --------
* Weighted average rates received/paid are shown only for swaps, caps and
floors for which net interest amounts were receivable or payable at December
31, 1993. For caps and floors, the rate shown represents the weighted average
net interest differential between the index rate and the cap or floor rate.
In addition to the interest rate contracts shown above, the Company also uses
exchange-traded options and futures in the trading account. At December 31,
1993, the trading account contained exchange-traded options purchased and
written, each having three month expiration dates, with notional principal
balances of $1,254 million and $700 million, respectively, and estimated fair
values of $288,000 and $(302,000), respectively. The notional principal amounts
indicated are substantially larger than the related credit or interest rate
risks. The net purchased position in exchange-traded options was taken at
December 31, 1993, in order to help protect the market value of
21
the trading account against rising short-term interest rates while maintaining
limited risk to declining rates. At December 31, 1993, futures contracts having
a notional principal of $161 million were also used to help reduce the interest
sensitivity of the trading account.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December, 1991, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 107, Disclosures about Fair Value of Financial
Instruments ("FAS107"). FAS107 requires the Company to disclose the fair value
of substantially all financial instruments, both assets and liabilities,
including those recognized and those not recognized in the Company's balance
sheet. There has been no impact to the Company's financial statements as a
result of the recognition, measurement or classification of financial
instruments. See "Notes to Consolidated Financial Statements," Note 15, Fair
Value of Financial Instruments for a discussion of the Company's accounting
policies and methodologies.
These disclosures should not be considered a surrogate of the liquidation
value of the Company or its Subsidiary Banks, but rather represent a good-faith
estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination, or issuance. It should also be noted
that the Company has not valued any intangibles associated with the Company's
core deposits as is allowed by the provisions of FAS107.
CAPITAL RESOURCES
Shareholders' equity at December 31, 1993, increased 8 percent from December
31, 1992, after increasing 13 percent in 1992. Net income after dividends
accounted for 92 percent of the increase in shareholders' equity in 1993,
excluding the reduction in total shareholders' equity due to the redemption of
all of the Company's preferred stock, and for 90 percent of the increase in
1992. During 1991, the Company issued 261,000 shares of preferred stock in an
acquisition and sold 1,350,000 shares of common stock to European investors in
a private placement. These two transactions contributed $44 million to equity
and accounted for 49 percent of the increase in shareholders' equity for 1991.
During the third quarter of 1993, the Company redeemed all of the outstanding
preferred stock.
Dividends of $28 million were declared on the Company's common stock in 1993,
which represented a 24 percent increase over 1992. The 1993 annual dividend
rate per common share was $.76, a 14 percent increase over 1992. The dividend
payout ratio for 1993 was 32 percent compared to 33 percent for 1992 and 34
percent for 1991. The Company intends to continue a dividend payout ratio that
is competitive in the banking industry while maintaining an adequate level of
retained earnings to support continued growth.
During the fourth quarter of 1992, executive officers and other individuals
exercised stock options for 665,000 shares of common stock. In connection with
the exercise of options for 308,000 of the shares, the Company received as
payment the proceeds of a loan made by the Company for approximately $3
million. These shares have been reflected as issued and outstanding in the
Statements of Shareholders' Equity with an offsetting reduction of total
shareholders' equity for the amount of the loan. Additionally, the Company
realized tax benefits of $1.9 million from the exercise of nonqualified stock
options during the fourth quarter of 1992 which are reflected as increases in
surplus in the Statements of Shareholders' Equity.
A strong capital position, which is vital to the continued profitability of
the Company, also promotes depositor and investor confidence and provides a
solid foundation for the future growth of the organization. The Company has
satisfied its capital requirements principally through the retention of
earnings. The Company's five-year compound growth rate in shareholders' equity
of 12 percent was achieved primarily through reinvested earnings.
Average shareholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1993 was 7.57 percent compared to 7.09 percent in
1992 and 6.69 percent in 1991. In order to maintain this ratio at appropriate
levels with continued growth in total average assets, a corresponding level of
capital growth must be achieved. The table below summarizes these and other key
ratios for the Company for each of the last three years.
22
RETURN ON EQUITY AND ASSETS
DECEMBER 31,
-------------------
1993 1992 1991
----- ----- -----
Return on average assets................................... 1.27% 1.12% 1.03%
Return on average common equity............................ 16.98 16.12 15.75
Common dividend payout ratio............................... 31.80 33.33 33.91
Average equity to average assets ratio..................... 7.57 7.09 6.69
Two important indicators of capital adequacy in the banking industry are the
leverage ratio and the tangible leverage ratio. The leverage ratio is defined
as common shareholders' equity, minus goodwill and other intangibles disallowed
by the Subsidiary Bank's regulators, divided by total quarterly average assets
minus goodwill and other disallowed intangibles. The tangible leverage ratio is
defined as common shareholders' equity, minus all intangibles, divided by total
quarterly average assets minus all intangibles. Even though core deposit
intangibles and goodwill increased from acquisitions during 1993, the leverage
ratio remained well within regulatory guidelines: 7.31 percent at year-end
1993; 6.86 percent at year-end 1992; and 6.43 percent at year-end 1991. For the
same periods, the tangible leverage ratio was 6.95 percent at year-end 1993;
6.55 percent at year-end 1992; and 6.01 percent at year-end 1991. The detail
for the computation of these ratios is provided in the following table. Other
disallowed intangibles represent intangible assets, other than goodwill,
recorded after February 19, 1992, that are excluded from regulatory capital.
Other intangibles recorded before that date continue to be included in
regulatory capital under the "grandfather" provision of Federal Reserve
regulations. The $6.5 million increase in shareholders' equity resulting from
the Company's adoption of FAS115 on December 31, 1993, is not presently allowed
to be included in the calculation of regulatory capital by the Federal
regulators.
LEVERAGE RATIO CALCULATIONS
DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN THOUSANDS)
Total fourth quarter average assets....... $7,241,032 $6,939,172 $6,547,287
Less: Goodwill.......................... 8,981 7,465 6,060
Other disallowed intangibles.......... 1,716 -- --
---------- ---------- ----------
Tangible average assets before deduction
of other intangibles..................... 7,230,335 6,931,707 6,541,227
Less: Other intangibles................. 27,535 23,124 29,210
---------- ---------- ----------
Tangible average assets............... $7,202,800 $6,908,583 $6,512,017
========== ========== ==========
Total period-end common shareholders' eq-
uity..................................... $ 545,584 $ 483,316 $ 426,530
Less: Goodwill.......................... 8,981 7,465 6,060
Other disallowed intangibles.......... 1,716 -- --
Cumulative effect of adopting FAS115.. 6,494 -- --
---------- ---------- ----------
Total common shareholders' equity before
deduction of other intangibles........... 528,393 475,851 420,470
Less: Other intangibles................. 27,535 23,124 29,210
---------- ---------- ----------
Tangible period-end common sharehold-
ers' equity.......................... $ 500,858 $ 452,727 $ 391,260
========== ========== ==========
Leverage ratio........................ 7.31% 6.86% 6.43%
Tangible leverage ratio............... 6.95 6.55 6.01
Risk-based capital guidelines were issued with graduated compliance beginning
in 1990 with full compliance by year-end 1992. The guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier I capital, which consists of common equity less goodwill and other
disallowed intangibles, amounted to $528 million at December 31, 1993. Tier II
capital components include supplemental capital components such as qualifying
allowance for loan losses and qualifying subordinated debt. Tier I capital plus
the Tier II capital
23
components is referred to as Total Qualifying Capital and was $666 million at
year-end 1993. The percentage ratios, as calculated under the guidelines, were
10.49 percent and 13.23 percent for Tier I and Total Qualifying Capital,
respectively, at year-end 1993. The $75 million of subordinated debt issued by
the Company in the second quarter of 1993 represented Tier II capital and
favorably impacted the Company's Total Qualifying Capital.
DECEMBER 31,
-------------------
1993 1992 1991
----- ----- -----
Risk-based Capital Ratios:
Tier I Capital Ratio..................................... 10.49% 9.87% 9.70%
Total Qualifying Capital Ratio........................... 13.23 11.61 11.50
The regulatory capital ratios of the Company's Subsidiary Banks currently
exceed the minimum ratios of 5 percent leverage capital, 6 percent Tier I
capital, and 10 percent Total Qualifying Capital required in 1993 for "well
capitalized" banks as defined by federal regulators. The Company continually
monitors these ratios to assure that the Subsidiary Banks exceed the
guidelines.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and mix
changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate
performance comparisons among various taxable and tax-exempt assets.
Net interest income for 1993 increased 3 percent over 1992 and 22 percent in
1992 over 1991. Increased volumes of earning assets and a historically high
interest rate spread generated the 1992 increase while in 1993 net interest
income grew at a slower rate due to a nine basis point decline in net yield on
earning assets. The schedule on pages 28 and 29 provides the detail of changes
in interest income, interest expense and net interest income due to changes in
volumes and rates.
Interest income decreased three percent in 1993 and one percent in 1992 after
increasing eight percent in 1991. Interest income in 1993 declined from 1992
despite a 5 percent increase in the volume of average earning assets due to a
71 basis point decline in the average interest rate. A 14 percent increase in
the volume of average loans accounted for the majority of the 4 percent rise in
fully taxable equivalent interest income on loans since rates declined 84 basis
points. Interest income on investment securities, including securities
available for sale, decreased 27 percent from 1992 to 1993. This decrease
resulted from an 83 basis point decrease in the yield on investment securities
available for sale offset by increases in the yield on taxable and tax-exempt
securities held-to-maturity of 20 and 30 basis points, respectively. Interest
income on trading securities increased by 49 percent as a result of a 74
percent increase in the average balance offset by a 101 basis point decline in
yield.
Total interest expense declined by 13 percent in 1993 due to a 66 basis point
decline in the rate paid on interest bearing liabilities, which more than
offset a 3 percent increase in volume. Interest expense on interest bearing
deposits decreased 14 percent as the result of a 76 basis point decrease in
rate and a 3 percent increase in the average volume. The one percent increase
in average borrowed funds, which includes interest bearing liabilities that are
not classified as deposits, was more than offset by the lower rates paid,
resulting in an eight percent decrease in interest expense for this category.
The trend in net interest income is commonly evaluated in terms of average
rates using the net yield and the interest rate spread. The net yield on
earning assets is computed by dividing fully taxable equivalent net interest
income by average total earning assets. This ratio represents the difference
between the average yield returned on average earning assets and the average
rate paid for all funds used to support those earning assets, including both
interest bearing and noninterest bearing sources of funds. The net yield
declined 9 basis points to 5.10 percent in 1993 following a 48 basis point rise
in 1992. The historically high net yield in 1992 of 5.19 percent resulted from
24
the substantial decline in the general level of interest rates over the past
few years coupled with an increase in the size of the Company's loan portfolio
which generally are higher yielding assets than investment securities. While
this loan growth continued throughout 1993, the 84 basis point decline in yield
on the loan portfolio was not enough to maintain the prior year level of net
yield given only a 66 basis point decrease in the cost of interest bearing
liabilities, down from a 175 basis point decline in the cost of interest
bearing liabilities from 1991 to 1992. The loan growth achieved in 1993 and
1992 was due primarily to the continued growth in the Company's indirect
lending portfolio and the favorable consumer response to the Company's
residential mortgage products.
During 1993, the net yield on interest earning assets was positively impacted
by the Company's use of interest rate contracts, primarily interest rate swaps
and interest rate floors, increasing the taxable equivalent net yield on
interest earning assets by 24 basis points. The use of interest rate contracts
impacted the yield and interest income on commercial loans where the net yield
was increased by 126 basis points and interest income was increased by $12
million. At the same time, the impact of interest rate contracts on interest
bearing liabilities was negligible, increasing interest expense by slightly
more than $2 million and the net cost of funds by 3 basis points. It is the
Company's intention to continue to use interest rate contracts to manage its
exposure to the changing interest rate environment in the future, although
there can be no assurance that the impact of interest rate contracts on the
earnings of future periods will be positive.
The net cost of funds, defined as interest expense divided by average earning
assets, decreased 62 basis points in 1993, while the net yield on total earning
assets declined 9 basis points. The rate paid on interest bearing liabilities
fell 66 basis points below 1992 levels. In 1992, the yield on total earning
assets rose 48 basis points while the rate paid on interest bearing liabilities
declined 175 basis points and the net cost of funds decreased 157 basis points.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing liabilities. The
interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of market interest rate movements. The
positive impact experienced from 1989 to 1992 from changes in the overall asset
and liability mix, combined with the favorable rate environment, did not
continue in 1993. The net interest rate spread decreased 5 basis points to 4.46
percent from the 1992 spread of 4.51 percent as the cost of interest bearing
liabilities fell at a slower pace than the yields earned on earning assets. The
increase in 1992 was 66 basis points from the 3.85 percent in 1991. See the
accompanying schedules entitled "Rate/Volume Variance Analysis" and
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" for
more information.
The following table presents certain interest rates without modification for
tax equivalency. The table on pages 26 and 27 contains these same percentages
on a taxable equivalent basis. Tax-exempt earning assets continue to make up a
smaller percentage of total earning assets. As a result, the difference between
these interest rates with and without modification for tax equivalency
continues to narrow.
DECEMBER 31,
------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ----- -----
Rate earned on interest earning assets.......... 8.02% 8.71% 9.77% 10.46% 10.76%
Rate paid on interest bearing liabilities....... 3.67 4.33 6.08 7.42 8.08
Interest rate spread............................ 4.35 4.38 3.69 3.04 2.68
Net yield on earning assets..................... 4.99 5.06 4.56 4.06 3.80
Interest income, as reported in the consolidated statements of income, on a
nominal yield basis decreased in 1993 by $17 million while net interest income
increased by $12 million. The seven basis point decrease in the net yield in
1993 was primarily a result of a decrease in the yields in the Company's
interest earning assets, specifically its loan portfolio. The Company will
continue to focus its attention in 1994 on increasing net interest income while
at the same time maintaining the current levels in interest rate spreads and
net yields. However, it cannot be assured that the negative trend in net yield
experienced in 1993 will not continue due to interest rate fluctuations and
other factors.
25
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
Taxable Equivalent Basis
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1993 1992
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- ------ ---------- -------- ------
(IN THOUSANDS)
ASSETS
Earning assets:
Loans, net of unearned
income*............... $4,837,321 $412,028 8.52% $4,227,721 $395,682 9.36%
Investment securities:
Taxable................ 734,171 58,772 8.01 1,571,993 122,728 7.81
Tax-exempt............. 134,916 12,978 9.62 167,101 15,579 9.32
---------- -------- ---------- --------
Total investment secu-
rities............... 869,087 71,750 8.26 1,739,094 138,307 7.95
Investment securities
available for sale.... 545,296 32,630 5.98 55,618 3,786 6.81
Trading account securi-
ties.................. 164,757 9,885 6.00 94,590 6,628 7.01
Federal funds sold and
securities purchased
under agreements to
resell................ 87,908 2,635 3.00 67,951 2,258 3.32
Interest bearing depos-
its with other banks.. 10,561 883 8.36 12,176 982 8.07
---------- -------- ---------- --------
Total earning assets.. 6,514,930 529,811 8.13 6,197,150 547,643 8.84
Allowance for loan loss-
es..................... (99,064) (66,660)
Unrealized gain (loss)
on investment
securities available
for sale............... 29 --
Cash and due from banks. 313,898 284,873
Other assets............ 317,463 322,301
---------- ----------
Total assets.......... $7,047,256 $6,737,664
========== ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Interest bearing liabil-
ities:
Deposits:
Demand................. $ 631,461 15,714 2.49 $ 526,994 15,172 2.88
Savings................ 1,642,308 47,364 2.88